AMD needs to prove it can withstand heat from Intel

MattAndrejczak

SAN FRANCISCO (MarketWatch) - Once again, Advanced Micro Devices Inc. will have to prove it can withstand the heat being applied by its larger rival, Intel Corp.

Investors, who pushed AMD shares
AMD, -0.39%
down more than 9% Friday after the company issued a profit warning, have grown skeptical that it can.

The stock is now down more than 55% since March, when Intel first signaled it was being hurt by AMD in the market for server chips. Ironic as it sounds, investors sold off AMD shares on that news because many guessed that Intel would cut prices to win back share in a lucrative market.

Those fears of a price war turned out to be well-founded, and AMD blamed its reduced forecast on lower sales prices for microprocessors used in PCs and data-server networks.

Sunnyvale Calif.-based AMD, the world's No. 2 maker of PC and corporate-server chips behind Intel, has long faced intense pressure from its Silicon Valley foe, which has more engineers and a much-larger marketing budget.

Now, in the minds of many industry watchers, Santa Clara, Calif.-based Intel has caught up to AMD's technology with its latest line of chips; that could spell continued problems for AMD.

"AMD has to find a way to be better than Intel or it's going to be a blood bath," said Fred Hickey, who runs the High Tech Strategist newsletter and holds no positions in AMD or Intel. "At the moment, for many of its products, AMD doesn't have a big lead anymore."

In some market niches, in fact, Intel may have sprinted ahead. Intel released a new server chip in November, based on quad core technology, which crams four processing engines onto a single piece of silicon.

AMD isn't expected to release its competing offering until this summer. That product, code-named Barcelona, could provide the lift the company seeks.

"We have no doubt that AMD's next-generation of products will be significantly more competitive," wrote Stifel Nicolaus analyst Cody Acree, who reiterated his hold rating on AMD. Yet, he said the new slate of products won't have much financial impact until 2008.

New products and more-advanced chip manufacturing should help AMD. Jeffries & Co. analyst John Lau said AMD's gross profit margin should improve later this year as its stamps out more processors on 12-inch wafers, which helps improve speed and performance.

Not long ago, AMD had been on a roll. Industry experts hailed AMD's Opteron line of server chips as superior to Intel's competing product. AMD also won new business with several PC and server makers, including Dell Inc., which previously had been an exclusive Intel customer.

Those moves helped boost AMD's share of the microprocessor market in 2006 and the company's stock price, which hit a five-year high early last year.

But Intel
INTC, +0.34%
pushed back last year, releasing its Core 2 Duo chips based on a new micro-architecture that Intel says offers better performance. It also cut prices on its PC chips, hurting AMD's gross profit margins.

This has put AMD in a precarious - and familiar - position.

"Intel has always bombed them in price. The only time it didn't work is when AMD had a big lead" in technology, Hickey added.

A bloody price war

ThinkEquity Partners analyst Eric Ross said major PC makers are "disillusioned" with AMD's technology roadmap and are likely to give longer-term design wins back to Intel.

Ross added that he thinks the price war between Intel and AMD will persist in the first half of 2007. He downgraded AMD to sell from buy Jan. 3, setting a $15 price target. He holds an accumulate rating on Intel with a $23 price target.

While AMD altered its roadmap with its $5.4 billion purchase last fall of ATI Technologies Inc., a major maker of graphics chips used in PCs and other consumer electronics, it is still being hurt by the Intel counter-attack.

AMD said late Thursday its operating income its fourth-quarter operating income -- excluding its recent acquisition of ATI Tech -- will be "substantially" lower than the $134.5 million it earned for the three months ended Oct. 1.

It also said "significantly lower" average selling prices for its chips "largely" offset a "significant increase" in unit sales.

AMD's gross margin is likely to decline for the third consecutive quarter. For the three months ended Oct. 1, AMD's gross margin fell to 51.4%, down from 56.8% in the prior quarter.

Investor Paul McWilliams, who runs the tech newsletter Nextinning.com, said he sold 5,000 AMD shares Friday morning even though he thinks the company will benefit in 2007 from demand for graphics and server chips.

He said he was disappointed AMD failed to offer a complete sales forecast. AMD said fourth-quarter sales would be $1.37 billion, up 3% from the prior quarter. But that figure excludes ATI Tech's operations.

"When they don't tell us, we have to assume the worst," said McWilliams, who had recently purchased AMD shares.

Maybe not good for Intel, either

Still, AMD's warning is not necessarily good news for Intel.

Both companies have been ramping up production of PC chips, which has led to record-high inventory levels in the PC-chip sector, according to iSuppli, a technology research firm.

Intel has been pushing its new Core 2 Duo chips into the market in large volumes, hoping to reclaim market share it lost to AMD.

In 2006, AMD boosted factory production between 30% to 35% from 2005 levels, company executives indicated at a Wall Street analyst meeting on Dec. 14.

High inventory levels and falling chip prices will hurt both companies, said Hickey, who had been a longtime backer of AMD until March of last year.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.